CHINA LAW DIGEST NEWSLETTER
Vol. 2, No.3 - March 6, 2003
TOPICS THIS ISSUE:
Foreign Investment:- Interim Measures for the Establishment of Foreign Trade Companies with Chinese and Foreign Investment
- Measures on the Administration of Venture Capital Enterprises with Foreign Investment
Internet:- Administration Rules on the Dissemination of Audio and Visual Programs over the Internet or Other Information Networks
Securities:- Circular on Several Issues Concerning the Acceptance of Investments in Futures Brokerage Companies
Interim Measures for the Establishment of Foreign Trade Companies with Chinese and Foreign Investment
Issuing Date: January 31, 2003
Issuing Authority: Ministry of Foreign Economics and Trade Cooperation (MOFTEC)
Effective Date: 30 days after the issuing date
Summary
The Interim Measures replaced the Interim Measures regarding Experiments on the Establishment of Foreign Trade Companies with Chinese and Foreign Investment, which was issued in 1996. The new Interim Measures loosen controls over foreign investment in domestic foreign trade companies, which will likely result in more joint venture trading companies in China. According to the Shanghai Daily, foreign invested companies (without trading rights) are currently using domestic trade agencies to handle shipment of goods imported into China. Such agencies usually charge up to 1%-1.5% of the value of the shipment in commission fees. The new Interim Measures may benefit many multinational corporations in terms of having access to domestic distribution channels in China and saving the commissions they now pay to domestic trade agencies.
Previously joint venture trading companies could only be established in the Pudong New Zone of Shanghai and Shenzhen Special Economic Zone. With the new Interim Measures, joint venture trading companies may be set up anywhere in China. The capital contribution of the foreign parties in a joint venture cannot be lower than 25% of the registered capital. Previously Chinese parties were required to hold majority shares (more than 51%) of the joint venture. The new Interim Measures remove such restrictions however provides in Article 16 that any applications in which the Chinese investors' proportion in the registered capital is below 51% will not be accepted by MOFTEC before December 11, 2003. The registered capital requirement is also lowered from 100 million Yuan to 50 million Yuan.
In order to be parties of a joint venture foreign trade company foreign investors shall satisfy the following requirements: (1) the average annual trade volume of foreign investors with China in the three consecutive years prior to the application shall exceed US$30,000,000; if the foreign trade company with joint investment is registered in the mid-west territory, the average annual trade volume of foreign investors with China in the three consecutive years prior to the application shall exceed US$20,000,000.
A joint venture foreign trade company may engage in, on its own behalf or as a commissioned agency, the import and export of goods and technologies and related services, as well as in the domestic wholesale business of goods imported by its own company.
Measures on the Administration of Venture Capital Enterprises with Foreign Investment
Issuing Date: January 30, 2003
Issuing Authority: Ministry of Foreign Economics and Trade Cooperation (MOFTEC), Ministry of Science and Technologies, State Administration of Foreign Exchange control, State Taxation Administration and State Administration of Foreign Exchange Control
Effective Date: March 1, 2003
Summary
The Measures replaced the Interim Measures on the Administration of Venture Capital Enterprises with Foreign Investments issued in 2001. They aim to further encourage foreign investment in the venture capital investing area in China. The new Measures provide more detailed regulations on venture capital investment compared with the former Interim Measures. Major changes are made in terms of company forms, requirements on compulsory investors and capital contribution of the investors.
Foreign Venture Capital (VC) Investing Enterprises may take either non-corporate or corporate forms. The Investors of Non-corporate Foreign VC Investing Enterprises shall be liable jointly and severally to an unlimited extent for the debts and obligations of the Foreign VC Investing Enterprise. Such investors may stipulate in the contract of the Foreign VC Investing Enterprise that, in the event that the assets of the Investing Enterprise are insufficient to pay back all the debts and obligations, the Compulsory Investor(s) as defined in Article 7 shall be liable jointly and severally to un unlimited extent for the debts and obligations of the Foreign VC Investing Enterprises while other Investors are only liable for such debts and obligations to the extent of their subscribed capital contributions respectively.
The number of investors in a Foreign VC investing Enterprises shall be at least two, and at most fifty, with at least one Compulsory Investor. The minimum amount of total subscribed capital shall be ten million US dollars for Non-corporate Foreign VC Investing Enterprises, and five million US dollars for Corporate Foreign VC Investing Enterprises. Except for the Compulsory Investors, all other investors must subscribe to a minimum capital contribution in the amount of one million US dollars. For the Compulsory Investor, the accumulated capital under its management in the previous three years shall be no less than one hundred million US dollars, at least 50 million of which should have been invested as venture capital. If the Compulsory Investor is a Chinese investor the accumulated capital under its management in the previous three years shall be no less than one hundred million RMB, at least 50 million of which shall have been invested as venture capital. Foreign investors are not required to hold at least 25% of the registered capital anymore. Please explain (The former Measures required that the foreign investment percentage in the registered capital was not lower than 25%. The new Measures provides that the percentage of foreign investment can be lower than 25% but such companies do not enjoy tax treatment set for FIEs.)
Capital contribution and changes thereof of Non-corporate Foreign VC Investing Enterprises shall comply with the following provisions: investors may contribute their capital to Investing Enterprises by installments according to the phases of venture capital investing businesses, but in no case shall such a period exceed five (5) years. The Investors may not reduce the amount of subscribed capital. However, if the Investors representing more than 50% of the total capital contributions and the Compulsory Investor(s) agree, subject to the approval by MOFTEC, the Investors may reduce the amount of subscribed capital, provided that the minimum capital requirement of ten million US dollars is not undercut. The Compulsory Investor(s) may not withdraw from the Investing Enterprises during the term of operation thereof. In special circumstances where withdrawal is inevitable, such withdrawal shall be subject to the approval by other Investors representing more than fifty percent (50%) of the total capital contributions.
Administration Rules on the Dissemination of Audio and Visual Programs over the Internet or Other Information Networks
Issuing Date: January 7, 2003
Issuing Authority: State Administration of Radio, Film and Television ("SARFT")
Effective Date: February 10, 2003.
Summary
The Interim Rules shall apply to the running of AV programs channels or columns that broadcast (including broadcasting on-demand) AV works and/or news, rebroadcast and/or live broadcast radio and/or television programs, and rebroadcast and/or live broadcast sports events, performances and other activities in the form of AV programs. The running of radio and television channels over the radio and television communication overlay network by radio and television-broadcasting organizations shall be governed and regulated by the Regulations of the PRC for the Administration of Radio and Television, the Interim Rules are not applicable thereto. Please confirm that this is the case. (Yes.)
The term "Information networks" as used in the Interim Rules shall mean the information communication systems connected by wire or wireless links by means of satellite, microwave, optical fiber, coaxial-cable, and other physical means and constructed over the Internet or other software platforms.
In principle, only one underlying entity of the Ministries, Bureau or Commissions under the Central Committee of the Chinese Communist Party or the State Council can engage in the dissemination of AV programs over the information networks. Only one entity or enterprise out of the enterprises and non-profit entities that are the subsidiaries to, held or controlled by the China Radio, Film and Television Group (excluding the Central People's Radio of China, CCTV and China Radio International) can engage in such activities.
The SARFT shall control the dissemination of AV programs over information networks by licensing. Such activities must obtain the "license of on-line dissemination AV programs".
The SARFT divides the AV programs into four categories to which different administrations are exercised: news; movies and TV dramas; entertainment, including music, traditional dramas, sports and general arts; specialty shows, including science and technology, education, health care, business and finance, weather, military affairs, legal affairs etc.
Circular on Several Issues Concerning the Acceptance of Investments in Futures Brokerage Companies
Issuing Date: January 14, 2003
Issuing Authority: China Securities Regulatory Commission (CSRC)
Effective Date: As of the issuing date.
Summary
In order to regulate the acceptance of investments by Futures Brokerage Companies and prevent illegal funds from entering into the futures market, CSRC established seven requirements on the investors of a future brokerage company: 1) investors shall be PRC legal persons; 2) the minimum requirements of registered capital and net assets shall not be less than RMB 10 million; 3) they shall have operated continuously for more than two years (one year provided that both registered capital and net assets exceed RMB 50 million); 4) shall have been profitable for the two most recent years (not required if both registered capital and net assets exceed RMB 50 million); 5) no illegal operations within the previous two years; 6) the investor's legal representative, general manager and natural person majority shareholder should not fall within the circumstances provided in Article 57 of the PRC Company Law, which sets out several circumstances which prevent a natural person to hold the position of company director, supervisor or manger; and 7) other requirements that may be stipulated by theCSRC.
The Circular also lists three types of entities that cannot be investors of a futures brokerage company: 1) an entity with objects of its pending legal proceedings exceeding 30% of its net assets; 2) branches of the Communist Party, government agencies, military army, civil organizations and centrally budgeted units; and 3) other organizations that are prohibited by laws and regulations to invest in future companies.
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The China Law Digest News is intended to be used for news purposes only. It should not be taken as comprehensive legal advice, and Lehman, Lee & Xu will not be held responsible for any such reliance on its contents.
